Many people find talking about their credit score completely intimidating. This is probably because they don’t thoroughly grasp it or what to do with it. At a high level, your credit score impacts your capability to access loans, credit cards, and business and personal financing. It takes time, consistency, and patience to improve your credit score. There are no hasty fixes to improve your credit score ranges. It’s critical to understand how to improve credit score ratings and set your expectations appropriately. This article aims to help you understand the basics of your credit score and how to improve it. It will also give you an understanding of credit score ranges.
What is a credit score?
The easiest way to define a credit score is as a number that shows your creditworthiness. Credit score ranges are typically between 300 and 850. This three-digit number shows creditors how likely you are to pay back any money they lend you. Lenders use this number when they are trying to figure out how risky it is to lend you money. When you have a credit score of 670 or above, it’s considered good. Anything below that falls into the fair or bad area.
Lenders can determine your history of repaying money in the past. To lenders, this indicates whether you are going to pay them back. There are a few different models that lenders can use to score your creditworthiness. This is why it’s important to know your credit score and work hard to keep it as healthy as you can.
How credit scores are calculated
The good news is that your credit score is calculated with one factor. There are actually five factors that go into the making of your credit score. Each one of these pillars is important. Lenders understand that there is a story behind your credit score, which is why they use multiple factors to outline the story. Since lenders know these factors about you, you should also be familiar with them and ensure they are all solid.
Payment history
Are you paying your bills on time? It’s important to know that any late payments are really bad for your credit score. All missed payments impact your credit score even more negatively than a late payment. Payments made on time are best for your credit score. You want to work hard to pay all of your bills on time every time. Only one late payment can decrease your credit score by 50 to 100 points. 35% of your credit score is made up by your payment history.
Credit utilization
Your credit utilization is how much of your available credit you are using. To keep your credit score in the good or above range, you want to use 30% or less of your credit. If you have a high balance, it makes lenders somewhat uneasy even when you pay your bills on time. An easy way to explain credit utilization is: if you have a credit limit of $10,000 and a balance of $3,000, you are using 30% of your credit. This also accounts for about 30% of your credit score.
Length of credit history
The amount of time you have been using credit is what defines your length of credit. The shorter the amount of time you have been using credit, the lower your credit score. When you have old accounts, they can help your credit. Closing old accounts often lowers your credit score. Length of credit is about 15% of your credit score.
Mix of credit
Lenders like it when you have a varied mix of credit. Some examples of types of credit include a car loan, a mortgage, credit cards, and a student loan. A mix of credit is about 10% of your credit score.
New credit and inquiries
While it may be surprising, applying for new credit can lower your credit score. A hard inquiry on your credit can lower your credit score a couple of points. That isn’t a big deal as long as you don’t have multiple applications in a short amount of time. You should allow for a good amount of space between applications. This accounts for about 10% of your credit score.
Credit score ranges explained
When it comes to credit score ranges, lenders use the range as a guideline. There isn’t a hard and fast rule about what number equals poor, good, or excellent credit. The credit score has a different weight depending on the type of credit a lender is evaluating. The intent of understanding credit score ranges is to help you understand how a potential lender reviews your risk.
Excellent credit
An excellent credit score frequently has a range of 850 – 760. These individuals are considered to be low risk and ideal borrowers for lenders. Their score shows that they are reliable over the long term. Explain the typical score range associated with excellent credit. When you are in this category, you have access to the best interest rates and the highest credit limits. You may also receive quick approvals.
Good credit
A good credit score frequently has a range of 759 – 670. Some lenders have very good and good categories, while others have only a good category. Someone in this category is seen as a low-risk and reliable borrower. They are considered financially responsible and pay their loans on time. Most applications in this credit range are approved and receive competitive interest rates. These individuals gain access to better loans and credit cards.
Fair credit
A fair credit score frequently has a range of 580 – 669. Those in this category are considered a moderate risk. Those in this category have had issues in the past but are working to improve their credit or have maintained a stable score. This isn’t the best credit score range, but it can be improved. Approvals are still possible in this range, but it isn’t a guarantee. If you are approved in this range, you will find that you have a higher interest rate. You will find that you have fewer choices.
Poor credit
A fair credit score frequently has a range of 300 – 579. Individuals in this category are considered high risk due to a history of missed payments and defaults. You may also have been in collections when in this credit range. In this range, individuals tend to have a repayment history that is not predictable, which also makes them a risk when it comes to lending. Those in this category will be subjected to denials of most of their applications. It’s important to keep in mind that this can be a temporary place, and your credit score can be improved.
What is a good credit score?
Most lenders considered a score of 739 – 670 a good credit score. Keep in mind that this is a range, and different lenders use different numbers on the high and low ends. They may use a different range based on the product in which you are interested. The higher your credit score, means you are more likely be approved and with better terms. There is a chance that you might not be approved in this category, but you are typically no longer considered a risk.
What is a bad credit score?
A bad credit score is typically any number around 579 or below. When you are in this range, you are considered a risky lender. Most likely, you have missed payments in your history when you find yourself in this range. You may also have defaulted on loans or have been in collections. Even when you find yourself in this range, it does not have to be a permanent location. It can always be temporary, but you will have to work to correct it. It will take time, but it’s possible. It’s not unusual for new business owners to run into credit challenges, especially when trying to start a business and cover early expenses.
How to get a credit score
To be able to have a credit score, you have to establish credit. That means you have to have some credit activity. Once you have credit activity and it’s reported to the credit bureau, that is how you begin to create a credit score. When you are young or recently starting to establish credit, it can be challenging. You can establish credit with a credit card or a loan. It takes time to build up your credit score when you don’t have any credit.
How to check your credit score
You should consistently check your credit score. Checking your score once a month is a good idea. Once a year, you should pull your entire credit report and review what’s included. When you look at your credit score, you are reviewing the three-digit number that is your credit score. When you look at your credit score, it’s considered a soft check, which doesn’t impact your credit score. A hard pull does impact your credit score and it happens when you apply for lending, such as a business loan. A quick and easy way to check your credit score is to check with your bank or credit card company. You can also review your credit report through a credit monitoring service such as Experian or Credit Karma.
How to improve your credit score over time
Fixing your credit is not something that happens overnight. It takes consistent effort over a period of time. You can start by making sure that you pay all of your bills on time. Next, you want to refrain from any unneeded new credit. You should work diligently at reducing your credit card balances. When you pull your credit report, you should review it for errors and fix any that you find.
How credit scores affect business loans and financing
There is a difference between business credit and personal credit. For new businesses or sole proprietors, your personal credit may have a larger impact on credit that you want to obtain for your business. Even if you’re attempting to get a small business loan, your personal credit may make a difference. Just like for personal loans, when it comes to business loans, when you have a higher credit score, you are more likely to be approved and get lower interest rates.
Preparing for financing beyond your credit score
While your credit score is important, it alone is not enough to receive funding for your business. You want to ensure that you have a legitimate business structure. This means it needs to be organized and set up properly, whether it be forming an LLC, a corporation or something similar. Your business should have revenue and cash flow, or you won’t be able to show a lender that you can repay the loan.
Conclusion
Credit scores are important, and even the lowest score is manageable. You can increase a poor credit score, but it will take time and patience. You should understand how credit scores work and how they are created. Once you have that knowledge, you are empowered to make better choices about your credit score. Take smart steps and work consistently to improve your credit score.